Sharman Athletic Gear Inc. (SAG) is considering a special order for 16,300 baseb
ID: 2516249 • Letter: S
Question
Sharman Athletic Gear Inc. (SAG) is considering a special order for 16,300 baseball caps with the logo of East Texas University (ETU) to be purchased by the ETU alumni association. The ETU alumni association is planning to use the caps as gifts and to sell some of the caps at alumni events in celebration of the university's recent national championship by its baseball team. Sharman's cost per hat is $4.30, which includes $2.15 fixed cost related to plant capacity and equipment. ETU has made a firm offer of $42,000 for the hats, and Sharman, considering the price to be far below production costs, decides to decline the offer. Required: 1-a. Determine the total cost of the special order. Total cost of the special order 1-b. In terms of maximizing short-term operating profit, did Sharman make the wrong decision in declining the offer from ETU? O Yes O NoExplanation / Answer
Answer:
1
Effect of special order on short-term operating income =
$6,955
Working notes for the above answer is as under
We have been provided with the information that,
Special order quantity =
16,300
Cost per unit =
$4.30
Allocated fixed costs =
$2.15
Special order offering price =
$42,000
1. Analysis of special sales order:
Incremental Cost per Unit:
Full cost per Unit =
$4.30
Less: Allocated fixed cost =
$2.15
Incremental Cost per Unit =
$2.15
Total Incremental Cost:
Incremental Cost per Unit =
$2.15
x No. of Units in Order =
16,300
Total =
$35,045
Offering price =
$42,000
Effect of special order on short-term operating income =
$6,955
________________________________________
2
Yes
Explanation
this is a missed opportunity for Sharman, caused by a mistaken reliance on full cost, rather than relevant cost, data.
Effect of special order on short-term operating income =
$6,955
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